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Welcome to another episode of Growing Pains, where we help entrepreneurs and founders who are considering funding get prepared for what that funding brings.
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And I'm here today with David Raleigh, an operating partner with Diversus Capital.
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They have about 1.7 billion AUM and are currently investing out of a$680 million discretionary fund, institutional fund.
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What I love about Diversus is their focus on software and technology companies, especially in the enterprise and B2B space.
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and the quality of their value creation team with operating partners like David.
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It's also the size of their operating partner team.
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It's rare that you have such quality and size in a mid-market private equity firm.
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And so Diversus is definitely a great company to deal with.
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David, as leader in the technology side of the operating partners, is responsible for both due diligence and post acquisition transitions.
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David is here to tell us everything we should know about how to prepare ourselves for growth equity or an exit with a private equity company with the sophistication of diverses capital.
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David, welcome to the podcast.
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So I guess the first question is, can you describe a bit about your specific thesis in this?
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Sure.
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So when a PE firm is considering acquiring a company, a platform, so primary acquisition, the thesis isn't firm at that point.
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So we might have an idea about the potential that the company might have given sort of the market conditions, how the market's growing relative to competition.
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Is the total addressable market sufficiently large, growing?
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And do we feel like the company has the potential to sort of expand there?
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But at the beginning, we're not exactly sure how or whether that might be the case.
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So during the diligence process, we're exploring a lot of different things we're looking at sort of the overall the tam so we understand sort of the where where the company plays and what the potential is but we also care about market dynamics we care about the competitive dynamics we obviously care about the performance of the company up until that point and so there are a lot of factors now technology plays a big role uh Generally, as you mentioned, Diversus is looking at software companies.
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So technology is kind of core to that.
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And in some cases, we're looking to acquire companies that have been built up over many years.
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And so there could be a lot of legacy technology.
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So that has to factor into our thesis.
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If we're investing in a growth thesis, let's say, like we believe that the company has an opportunity to grow and expand to take up more of that pie or take on an adjacent pie, then is the technology going to be an asset?
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asset or is it going to be a liability?
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And so even without sort of making judgments about, you know, is it purely good technology or purely bad technology, it's never that simple.
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It's just how would the technology sort of support that thesis if there is a growth thesis.
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Okay.
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Other PE firms have sort of a different approach and they're primarily looking at how they can optimize the operation of the business because they might believe that there's sort of inefficiencies built into the way that the company is operated.
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And so you're looking for ways to achieve those sorts of economies.
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And in that case, the technology can play a role there.
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Does the technology inherently incur a certain operational burden that you might have to address.
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And you might have to address that by re-platforming or dealing with tech debt or something like that, or simply changing the way the company goes about doing the business of building and delivering their product to their customers.
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So that is not your MO to go fix broken technology companies?
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Oh, there's
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always an aspect of that, right?
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So firms are looking for good deals and opportunities to create value over a relatively short period of time.
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And so if a company or It was like...
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killing it and just like a really high achiever and there's not really a lot that we think we could do in that period of time, then even though it might be a great company, it might not be a good deal for us, right?
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It's not a good opportunity to create a significant value.
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So even though we might be investing in a growth thesis, typically there's work to be done on the technology to achieve.
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Okay.
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And then, so that sounds like the thesis follows the opportunity to acquire a company, right?
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as opposed to a thesis and trying to fit companies into that thesis?
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Yeah, there will be a general thesis based on, you know, what we perceive as the company potential.
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But I can tell you that during the diligence process, it's a participatory exercise, right?
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So it's not just led by the deal team or sort of on the investment side.
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Operators and advisors and consultants who know something about the face are contributing to that.
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And so we're formulating the thesis and we're building a model that represents the kind of investment, the kinds of changes that we think would need to happen to achieve a particular outcome.
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Now we have sort of general ideas about what would look good at the end that we would want to achieve.
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And so the thesis is really like, so how are you gonna get there?
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And what's it gonna take to get there?
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So those aspects of it just become clarified.
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And we have to get to a level of clarity and conviction before we make the decision to invest.
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Right.
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And some companies actually have work with the team that they're looking at acquiring and actually walk through what their plan is for that company as part of the pre-acquisition phase.
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Is that your process as well?
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So there's certainly, you know, we're asking them to open the Komodo, right?
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Yeah.
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But at the same time, you want to avoid introducing bias into the conversation at that point.
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And you want to sort of get to the truth so that you can decide, you know, make decisions about what it would take to achieve the outcome you're after.
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So we don't want to telegraph an answer and then sort of hear that back.
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So there's a certain level of sort of trying to avoid introducing that kind of bias.
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We try to be forthcoming about what the opportunity looks like because, you know, we We want to understand, especially as we're talking to the leadership team, our members of the leadership team during that diligence process, what role they might play in helping us achieve
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it.
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Right.
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Okay.
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And you talked, I want to go back to the market size and the TAM because it doesn't seem like a clamp on strategy for you guys in enrolling into a market.
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It seems like you're picking verticals, SaaS verticals and sticking and letting that company grow within that as opposed to amalgamating a whole bunch of companies.
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Is that a fair statement?
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Yeah, that's generally true of diverses, obviously that's not true of a lot of other PE firms.
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One thing I've learned sort of working on the PE side and talking to other folks and other PE firms is like no two PE firms are exactly alike, right?
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And they may have very significant differences in their approach.
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And so some might approach it by looking to do roll-ups of different assets that are brought together.
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Typically we're looking for a solid platform and certainly M&A and adding on could be part of that thesis and how we achieve what we want.
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Right.
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It's rarely the case that we go into a transaction pulling together multiple parties.
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That can happen, it's just not, it hasn't been our experience primarily, where other PEs may do that exclusively.
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Right.
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Yeah, yeah.
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So that's the federation of, and sometimes it's a federation of companies, and sometimes they're looking for synergies across those portfolio companies that they can bring the best of breed and reduce operating costs.
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We like to have sort of a solid foundation.
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So even though a company that we acquire might not be able to get us where we need to go by themselves, just by sort of investing organically into the company, we typically don't sort of handicap a deal by saying like, well, it's only worth investing this company if you also get this company or these other companies.
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So, but that's just, you know, again, other PE firms might do that exclusively.
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That might be their primary approach.
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And we may do that in the future.
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So, you know, but...
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But for the most part, we're looking for a solid platform to build on.
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Okay.
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And unlike Venture, which is always looking for the moonshot to cover their portfolio of losses and other fundings, what is your approach to that company?
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So, I mean, I don't want to pick on any specific company, but I happen to use RoadMonk, right?
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And RoadMonk is interesting because it's a much simpler user experience in terms of using an Asana type of product, but it's not Asana, right?
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So it's not a moonshot.
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It's got a very specific niche for the early adopter, I guess, in that space.
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And Roadbunk was an add-on to Tempo.
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So it was part of building out and rounding out a larger strategic portfolio management capability that Tempo represented.
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Okay.
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So it was not acquired to be a standalone platform.
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It was adjunct to a platform that had already been.
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Interesting.
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Okay.
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Interesting.
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So that, so then that begs the question when you bring in, so you look at the company and look at the team, you're doing due diligence.
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You've got a great article that you posted a while ago about how you shouldn't look at the spot in time that you're acquiring.
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You should look at the evolution of that technology.
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Can you share with us some of those insights?
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Sure.
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So, so oftentimes when I brought in to do tech technical diligence.
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I will be engaging with the principle, you know, the technical principles at the company and they will show me basically a snapshot of where they are right now.
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And that's interesting, but I'm not, you know, I'm not buying into a static asset, right?
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I want to understand how it got there and the decisions that were made that led to what it is because it's never perfect, right?
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It's like you're adapting to changing conditions.
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You're sort of applying yourself to your best ability given the resources that you have available.
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And so I want to know the backstory to understand what I'm looking at.
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And that tells me a little bit of something about where it could go and how hard it might be to get there.
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But it also tells me a little something about you as a technical leader being able to tell that story and provide me that narrative.
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So I want to feel convinced that you have a deep enough understanding of the path that got you to the snapshot that I'm looking at today so that you can help get it to the next thing.
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And sometimes it's like I feel really good about what you have to say and And I totally understand the trade offs that you made that led to what we have today.
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And that would sort of inform maybe how we would build on that or leverage that experience.
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Other times it may be clear that like you weren't really involved and maybe you're not part of the picture going forward.
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So it's both a way for me to get an understanding of this complex asset that is the technology, but also it tells me a little bit of something about the technical leadership.
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It's really
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interesting because that story can be read different ways, right?
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In your agile development process, you're always tinkering and changing.
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That leads to the evolution of the product.
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Yeah, yeah.
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So what are you looking
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for in the storytelling of those iterations?
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Yeah, typically along the way, the path is punctuated by you know, hitting roadblocks and having to architect beyond them.
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And so, so I want to understand what was the last roadblock you hit and then how you sort of dealt with it, because almost certainly you're going to hit another roadblock at some point down the line.
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And I might be very involved in that experience.
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So I want to understand sort of how you went about assessing your options.
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Did you see it coming?
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Do you know what to do?
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And frankly, it's like, I want to know, do you see the next roadblock?
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Like you should be able to identify because it's there.
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It's always there, right?
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And you should be able to tell me like, well, when we scaled at this point, I know that I'm going to have to revisit the architecture around some component up here.
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And so here's what I'm looking at to tell me when I'm getting close so that I can begin that work.
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And it's frankly, even as scary as that potential roadblock might be, it's comforting to know that like you can see it and you have a plan for addressing it.
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That's actually says a lot to me about your ability
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to help growth.
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Have you ever faced a situation where that was just selling themselves, but they really didn't?
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They were more like firefighters in their gut.
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They're not solution architects.
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Yeah, so there's a couple of ways to address that.
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So one thing is like, they don't know what they don't know, and you can sort of get to that.
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And if you have sort of an understanding of architectural patterns and the inherent limitations with different approaches, you can kind of see whether they recognize that or not.
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So that tells me something.
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If there's sort of patterns of behavior that suggest that decisions around, architectural decisions are being driven kind of singularly and The team is generally made up of people who take the hits and just implement what they're told.
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That's a limitation unto itself, right?
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Because that means that I'm putting a lot of emphasis and pressure on the one person who sort of sees the big picture.
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And that's a lot.
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I would rather have a smaller, more actively, a team that's more actively involved in the solution space who's contributing to that.
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And so that's a tough one to assess, certainly during the very concentrated period of doing diligence, but it's certainly something that you strive to understand, if not before a transaction, very closely afterwards, because it may affect the very makeup of the team and you might have to rebuild this team with a different kind of resource than has been there in the past
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yeah those are really tough calls to make i'm sure and i guess what you know we've done a fair amount of due diligence on existing teams when we help companies refactor and stuff and we do find those scenarios where you've got a firefighter you just love whose importance is the firefight you put out all the fires with a new product They're out of a job, it feels like, and they resist it.
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How do you deal with that transition when you're...
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I mean, obviously, you've got a much bigger stake in the company, so you can be pretty prescriptive, but you also don't want to lose the whole engineering team.
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And there might be a lot of gold in the Nara Hills where the engineering team has been doing tickets, but they really want to do more solutions engineering.
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Yeah.
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How
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do you
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transition there?
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So there's no superficial way to do that.
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Like, you have to, as quickly as possible...
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you know, talk to and get to know and assess everybody down to the individual contributor.
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Like you have to gain a direct opinion on the strengths and weaknesses of the team, not just at the leadership level, but sort of all the way out to individual contributors who are writing code.
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Wow.
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So that's a big investment of time to do that.
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And time's wasted.
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You don't have a lot of time to waste to get there.
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But there's no way around it.
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So there's no shortcuts to doing that.
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Here's something to consider, though.
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It depends a lot on our thesis, right?
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So if we're going to grow or if we're sort of underwriting significant growth and potentially changing to address an adjacent market, let's say, or sort of exploit a part of the market that they're already in more fully than they do now, or going up market or something like that, Getting stuck in firefighting mode, you could just spend all of your time just sort of spinning that wheel.
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Right.
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And so if it's the case that I need to make some substantial changes, that would be sort of a red flag for me.
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Like if they're really stuck in that firefighting mode or just sort of tactically being responsive to issues that they are now, I'll probably have to introduce a different kind of leadership that is thinking more holistically about how we grow or change to exploit a market that we don't right now.
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So that happens.
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That begins to happen on your first call during the So you're already starting to form an opinion about the capabilities and limitations of the mindset of the folks that are on board.
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Because in a very short period of time, post-transaction, you have to put in place a plan for how you're going to potentially reshape the organization to execute against the plan that makes
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up.
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Right.
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So we'll go into the first hundred days in a minute.
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But going back to that, so if you were to look at your due diligence process, how much, I mean, technically, technology is easier to fix than people, right?
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Generally true, yes.
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I would say that's true.
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It's pretty blatant fact or not fact, whereas people issues are much more nuanced.
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So you must become also not just a technical due diligence guy, but also very much a people reader.
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Yeah.
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Is that an acquired skill or is that something that you've always had intuitively?
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Well, that's tough to say, but it's certainly important to be able to do it effectively.
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When I do technical diligence, I'm looking at a handful of areas.
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So obviously I'm looking at the architecture, its ability to scale, baggage that it might carry, that sort of thing, limitations there.
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I'm also looking at the data architecture for similar concerns and that sort of thing.
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And I'm looking at those things with what the potential thesis might be about where we need to take this thing.
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But I'm also looking at sort of their software development lifecycle and how they go about the business of building software and how that works.
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I will look at artifacts that are part of that process to see for myself how well they are at communicating ideas and initiatives and how that turns into work that's executed by the team.
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I'll look at the organizational structure in particular.
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I'll look at the relationships between engineering and product.
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That's sort of the foundational relationship.
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And I'm looking for sort of anomalies that would potentially limit their ability to execute effectively.
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So what do you mean by that?
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Yeah, so if they're...
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If they operate in a very disjointed way and there's sort of any evidence of finger pointing or us versus them or anything like that, that's going to get in the way of the progress that needs to be made.
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So I want clarity about how requirements and initiatives come into being, how they're expressed, how they're conveyed, the role that the engineering team plays in coming up with solutions.
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It's being told just, you know, implement
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this thing.
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Once you got to build it next month, right?
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Yeah.
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Or, yeah, or like, I'm going to tell you how to build this thing, you know, so I'm looking for there.
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I'm looking at sort of how what their testing approach is.
00:19:47.630 --> 00:19:58.298
And I say testing approach versus like how they do QA, because QA can sometimes be just like limited to a title or department of people.
00:19:58.519 --> 00:20:01.060
And typically testing is broader than that.
00:20:01.501 --> 00:20:05.605
So I'm looking at sort of holistically how they Think about testing.
00:20:05.965 --> 00:20:11.654
Testing is also, you know, is this feature that we're developing delivering value, right?
00:20:11.714 --> 00:20:15.559
So I need a test hypothesis about value delivery.
00:20:15.660 --> 00:20:17.222
And so how do they go about doing that?
00:20:17.682 --> 00:20:28.097
So I'm interested in sort of the overall interaction and sort of the way that they work together to achieve a specific, you know, outcome.
00:20:28.318 --> 00:20:28.499
The
00:20:28.699 --> 00:20:33.132
other thing I looked at, Before you leave that, because that's very interesting.
00:20:33.672 --> 00:20:38.636
Because usually you're testing technically whether it's going to take the load capacities and not break, et cetera.
00:20:38.797 --> 00:20:40.239
You're not testing value.
00:20:40.338 --> 00:20:46.704
The value should have been pre-tested by customer success teams that talk to product or sales team that talk to product.
00:20:46.904 --> 00:20:47.444
How do you...
00:20:47.505 --> 00:20:59.576
But if you're defining a capability that you think was going to deliver value, and maybe it's going to deliver value to sell more software or reduce your...
00:21:01.122 --> 00:21:09.520
retention and that sort of thing, or to open up a new market segment that depends on that capability.
00:21:09.560 --> 00:21:18.382
So as you conceive of that, you start to think about like, well, how will I know whatever I come up with actually is effective at achieving that?
00:21:18.657 --> 00:21:29.851
So you need to sort of build into your planning process and your development process the things you're going to measure that will tell you whether you got it right or not.
00:21:30.251 --> 00:21:33.496
And I want to see that kind of thinking early on.
00:21:33.655 --> 00:21:43.166
And sometimes you can find it in the artifacts that get generated, in the PRDs and the epics and the user stories and the accepted criteria that's associated there.
00:21:43.207 --> 00:21:45.470
And how much are they thinking about that?
00:21:45.602 --> 00:21:53.729
Now, I have to tell you that it's rare that I find that that practice is fully embraced by product development teams.
00:21:54.108 --> 00:22:00.515
But it's certainly, I think, important to a high-functioning team that's going to deliver value and able to iterate on it.
00:22:00.595 --> 00:22:02.957
So it's sort of the essence of being agile.
00:22:04.498 --> 00:22:12.545
And if that's going to be important to what we're trying to achieve with this company, then I have to assess what it will take to get that company there.
00:22:12.766 --> 00:22:15.567
And it might affect their philosophy of how they do things.
00:22:15.567 --> 00:22:20.798
that it might affect the makeup of the teams that are involved.
00:22:21.057 --> 00:22:27.928
The last point I'll make about organizational design that is part of my diligence process and why it matters.
00:22:28.308 --> 00:22:31.594
So I think we all know about Conway's Law, right?
00:22:31.653 --> 00:22:41.628
So Conway's Law suggests that an artifact generated by an organization resembles sort of the communication channels and the structure of that organization.
00:22:41.949 --> 00:22:47.176
So more simply stated, like teams tend to build software that looks like themselves, right?
00:22:48.066 --> 00:22:54.653
If you have two teams working independently, they will generally create two things that are independent of each other.
00:22:55.053 --> 00:23:06.284
And so I'm looking for the impact of Conway's Law or how Conway's Law manifests in the artifacts that an organization has created.
00:23:06.505 --> 00:23:15.794
And in some cases, it's like well-considered and it's like, yep, that's exactly what we want and the organization is well-suited to delivering that.
00:23:16.354 --> 00:23:26.992
But in other cases, the objective might be to integrate two systems or to bring things together, and yet the organization is structured in such a way that that's not natural.
00:23:27.266 --> 00:23:30.589
And so Conway's Law will have an impact on that.
00:23:30.730 --> 00:23:41.284
So I'm looking for the telltale signs of how Conway's Law is affecting the artifacts that are produced, the products that are produced, and whether that needs to change.
00:23:41.584 --> 00:23:42.065
Interesting.
00:23:42.244 --> 00:23:55.321
So let me guess, when you have that singular architect who's the firefighter, that person has hired people very similar to he or she, or to be subservient to that person, and you have a very bad...
00:23:56.385 --> 00:23:58.689
ConwayLaw.com in that respect.
00:23:58.749 --> 00:23:59.951
Is that consistent?
00:24:00.510 --> 00:24:01.211
It depends.
00:24:01.833 --> 00:24:03.174
That's a little bit different.
00:24:03.234 --> 00:24:13.769
So Conway's Law would be more directly associated with the team that's actually delivering, like building out whatever that architect might be sort of describing, dictating.
00:24:14.789 --> 00:24:20.458
I think there's a different kind of bias you get when you have sort of singular control over architectural vision.
00:24:20.961 --> 00:24:27.715
Now you're putting a lot of, you're betting a lot on that architect getting it right.
00:24:28.135 --> 00:24:34.409
And perhaps you're not leveraging the input and capabilities of other people.
00:24:34.509 --> 00:24:36.673
So it's kind of a single point of failure.
00:24:37.089 --> 00:24:42.759
which we always try to avoid in anything that we build or any organization that we create.
00:24:43.179 --> 00:24:53.715
So we look for and try to eliminate single points of failure, even during the diligence process, where we sort of have our eye out for both in the software architecture and in the organizational structure.
00:24:53.855 --> 00:24:54.336
Interesting.
00:24:54.576 --> 00:24:58.583
And when you're doing more, do you do any consumer product?
00:24:59.203 --> 00:25:00.286
For the most part, yes.
00:25:00.385 --> 00:25:07.414
Yeah, for the most part, we're investing in B2B software companies and sometimes those, you know, B2B to C.
00:25:07.535 --> 00:25:13.561
So it's businesses that are building products and services for other businesses that might serve the children.
00:25:13.582 --> 00:25:13.662
Okay,
00:25:13.923 --> 00:25:18.848
yeah, because I was going to ask about diversity of the engineering team, ethnically everything, right?
00:25:18.868 --> 00:25:21.592
It impacts who they're building for in the demographic.
00:25:22.212 --> 00:25:22.413
So
00:25:22.712 --> 00:25:25.135
diversity is a big word.
00:25:25.876 --> 00:25:26.198
Yes.
00:25:26.594 --> 00:25:33.481
Its impact is profound in ways beyond sort of the superficial way that we sometimes think about diversity.
00:25:33.521 --> 00:25:34.384
Right.
00:25:35.105 --> 00:25:51.367
that diversity isn't just sort of the makeup of the team and where those people came from, but it's like what kind of companies they work for, their levels of experience, the industries they've been in, the type of background and education and that sort of thing.
00:25:51.468 --> 00:26:01.260
So oftentimes, especially with earlier startups, you tend to hire people who kind of look like yourself in some fashion, right?
00:26:02.018 --> 00:26:07.883
you know, I hire people who want to this particular school or who have experience from this particular company.
00:26:07.923 --> 00:26:15.650
And I know, and those are like high achievers and, and, or that company has given them great experience and you might absolutely be right.
00:26:15.789 --> 00:26:24.037
And maybe it makes sense actually to be sort of very uniform early days because you have to outperform much bigger companies.
00:26:24.057 --> 00:26:25.218
You have to hit above your weight.
00:26:25.679 --> 00:26:30.722
And sometimes the most effective way of doing that is having very like-minded people who are working together.
00:26:30.863 --> 00:26:47.682
However, you are susceptible to change that you won't see coming because that similarity is effectively putting blinders on you and you don't have sort of the perspective that will allow you to adapt to change.
00:26:48.042 --> 00:26:51.907
And typically when we're investing in a company, it's already past that.
00:26:52.828 --> 00:26:56.212
PE firms tend not to invest in very early stage startups.
00:26:56.292 --> 00:26:59.167
And so you're already past that.
00:26:59.428 --> 00:27:06.094
And maybe diversity plays even a more important role because you are having to adapt to change.
00:27:06.173 --> 00:27:11.238
And frankly, you're introducing change and you need people who are able to sort of adapt.
00:27:11.357 --> 00:27:14.540
And a diverse set of dimensions, I think, helps.
00:27:14.721 --> 00:27:16.462
And what are the biggest changes that happen?
00:27:16.522 --> 00:27:18.263
So let's go into the first 100 days.
00:27:19.045 --> 00:27:24.490
You're going to have a whole new reporting metrics for some companies that don't have good FP&A.
00:27:25.810 --> 00:27:32.025
I've been through these growth stages And you just let stuff fall through the cracks just to get to where you need to get to.
00:27:32.665 --> 00:27:37.638
And then you get professional investment capital.
00:27:37.679 --> 00:27:39.363
You have to be a professional.
00:27:39.403 --> 00:27:43.354
That's why we call this podcast Growing Pains because you're growing up.
00:27:43.842 --> 00:27:49.015
And even a sophisticated venture is going to make some of those demands on you.
00:27:49.075 --> 00:27:56.051
So what are the most important changes that you see consistently happening for you and for Diversus as a whole?
00:27:56.071 --> 00:27:56.993
Because there's a whole bunch.
00:27:57.054 --> 00:28:00.422
There's go-to-market, there's talent, there's everything else in those first 100 days.
00:28:00.742 --> 00:28:01.726
Yeah.
00:28:01.846 --> 00:28:01.885
So...
00:28:02.018 --> 00:28:18.484
One thing that happens is you've started a process during diligence, you've formulated a plan, the beginnings of a plan, but you only have limited access to everything, to the people, to the systems, that sort of thing.
00:28:18.585 --> 00:28:22.832
So very early day, like on day one, you have to dive in.
00:28:22.872 --> 00:28:31.146
So we tend to take kind of a swarm approach where we have operating partners with different functional expertise.
00:28:31.988 --> 00:28:35.772
And you're just really absorbing and getting your hands on everything.
00:28:35.853 --> 00:28:45.284
So you have to do a deep level of assessment to confirm or refute what you thought you knew going into this transaction.
00:28:45.403 --> 00:28:51.171
And the outcome of that, sort of the output of that exercise is a transformation plan, right?
00:28:51.191 --> 00:29:03.406
So in the first hundred days or sort of like before your first board meeting, you have to have a plan of attack Now, some things may take place on day one or day zero or day minus one.
00:29:03.748 --> 00:29:09.154
The leadership of the company that we acquired might not be part of the transaction, right?
00:29:09.896 --> 00:29:13.361
And certainly across PE, that happens more often than not.
00:29:13.481 --> 00:29:18.989
Like it's actually quite rare that the CEO will stay on post-transaction.
00:29:19.190 --> 00:29:22.334
I think it's about a quarter of the time that maybe that happens.
00:29:22.753 --> 00:29:29.720
And then, you know, of those that stay on more than half of the time within the first two years, they're replaced.
00:29:30.119 --> 00:29:34.624
And it, you know, it's not necessarily because like that person is incompetent.
00:29:34.743 --> 00:29:49.616
It's just that they might not be what you need to get to the next stage that you need to bring this company to, or they might just not be fully aligned with what you have in mind of doing with this company because you have taken control over the company and they might be done.
00:29:49.917 --> 00:29:54.653
It's like, yep, I got my exit and, and I've done, my work here is done.
00:29:55.233 --> 00:30:02.599
So in that first hundred days, you're, you're sort of assessing and having to put in place a new work structure oftentimes.
00:30:02.921 --> 00:30:03.240
Right.
00:30:03.461 --> 00:30:11.288
And, and then, you know, there may be an assessment period where it's like, I want to give this, you know, executive a period of time to see how they do.
00:30:11.508 --> 00:30:20.955
But like, I'm going to keep a close watch on this because I can't, you know, get into year two and two, year three with any regrets about not having leadership in place.
00:30:20.996 --> 00:30:25.200
So you have to make like the biggest thing that you can do is getting the right leadership in place.
00:30:25.200 --> 00:30:25.621
place.
00:30:25.701 --> 00:30:28.544
And typically you wait longer than you should.
00:30:28.744 --> 00:30:32.910
Like you never look back and say, I was too fast by making that change.
00:30:33.150 --> 00:30:37.615
It's usually, I probably should have made it six months earlier.
00:30:37.675 --> 00:30:38.656
Yeah, exactly.
00:30:38.696 --> 00:30:46.207
So you need to do the work necessary to inform potential changes in leadership.
00:30:46.448 --> 00:30:51.233
And you have to feel good about it because these changes don't come without cost.
00:30:51.809 --> 00:30:58.917
Um, and, um, and so, but there, there's certainly a cost of, of not, of, of not making action.
00:30:58.938 --> 00:31:00.640
Yeah.
00:31:00.660 --> 00:31:08.669
And when you do those leadership changes, how much, so you mentioned 25% of the CEOs will stay, then another 50% of those are gone.
00:31:08.689 --> 00:31:13.855
So really only about 10 to 12% are staying, uh, post exit.
00:31:14.316 --> 00:31:16.337
How does that impact the rest of the SLT?
00:31:16.673 --> 00:31:23.923
And for that matter, if it's the leadership of engineering that changes next, how many of those are loyal to that engineer and want to move on with them?
00:31:24.202 --> 00:31:25.444
It could happen, right?
00:31:25.484 --> 00:31:30.371
So it depends on the nature of the company and how it's built.
00:31:30.451 --> 00:31:32.574
And it's something that you have to keep in mind.
00:31:32.753 --> 00:31:45.390
So we're always going to be doing sort of talent assessment and identifying who the keepers are that we really have to invest in to make sure that they're part of the solution and they feel good about that.
00:31:45.857 --> 00:31:48.240
and they're ready to step up and that sort of thing.
00:31:48.520 --> 00:31:58.050
We might identify some where it's like, well, I don't have enough data to know whether they're part of the solution or not, but I have to make that decision within a quarter or two.
00:31:58.230 --> 00:32:00.073
So how am I doing that?
00:32:00.713 --> 00:32:15.509
And if there are others where it's like, well, we need to uplevel this or like we're going to change the shape of the organization in a way and maybe there's efficiencies to be gained in doing that.
00:32:15.842 --> 00:32:21.209
then you have, you know, in that first 100 days, you have to have your plan of what changes you're going to make.
00:32:21.388 --> 00:32:26.315
And you don't want to do these changes sort of onesie-twosie over the course of a year.
00:32:26.576 --> 00:32:34.445
It's better to sort of have a strong plan of what you want the organization to look like and kind of do it all at once.
00:32:34.645 --> 00:32:39.912
Sort of take the hit, but also get the full benefit of putting in place the organization that you think you need.
00:32:40.272 --> 00:32:40.854
I like that.
00:32:40.874 --> 00:32:42.375
That's sort of the Bill Horowitz line.
00:32:42.415 --> 00:32:44.178
If you're going to eat shit, don't nibble.
00:32:45.089 --> 00:32:53.240
Yeah, I try to avoid that metaphor when I'm in the
00:32:54.101 --> 00:32:54.480
midst of
00:32:54.780 --> 00:32:54.882
it.
00:32:55.001 --> 00:32:56.083
Yeah.
00:32:56.403 --> 00:33:07.717
And you have to come to terms with the fact that you might have 50 or 60% attrition in the first year or two, right?
00:33:07.817 --> 00:33:11.902
That seems very extreme and detrimental to the success of the company.
00:33:12.481 --> 00:33:13.442
But it happens.
00:33:13.542 --> 00:33:19.667
This represents a pretty significant change in the direction of the company and how it goes about its business.
00:33:19.867 --> 00:33:31.959
You know, if you've invested in a company that's sort of a lifestyle company, meaning like it's been, they've been doing just enough to sort of maintain a nonprofit to keep, you know, happy and that sort of thing.
00:33:31.999 --> 00:33:37.123
And then along comes an acquirer that has a growth strategy in mind.
00:33:37.463 --> 00:33:39.484
And so you're going to put the pedal to the metal.
00:33:39.586 --> 00:33:41.707
And it was like, that's not what I signed up for.
00:33:41.727 --> 00:33:44.432
I don't want, you know, That's too hard, right?
00:33:44.471 --> 00:33:45.855
And I don't want a piece of that.
00:33:46.296 --> 00:33:54.231
And so you want those people to self-select out or you need to help them out, but they're not going to help you get to where you need to be.
00:33:54.332 --> 00:33:54.953
You need to...
00:33:55.586 --> 00:33:58.929
attract and retain people with the right mindset.
00:33:59.169 --> 00:34:01.832
And it's typically a high performance mindset.
00:34:02.031 --> 00:34:02.712
Right, right.
00:34:03.012 --> 00:34:03.272
Okay.
00:34:03.513 --> 00:34:08.719
And your MO in terms of company tenure within the portfolio is three to five years?
00:34:09.398 --> 00:34:11.340
Just to say anymore, right?
00:34:11.681 --> 00:34:11.762
You
00:34:11.802 --> 00:34:17.467
know, it used to be five years was sort of a good rule of thumb of a horrible period for a PE firm.
00:34:17.786 --> 00:34:20.309
You know, the market dictates that, right?
00:34:20.429 --> 00:34:22.771
And so that can certainly be extended.
00:34:22.891 --> 00:34:30.418
And it's possible that you know, you could achieve your sort of your value creation goals earlier than that.
00:34:30.599 --> 00:34:37.085
And the market is good and there's a good opportunity, but, but usually we're focused on getting to where we need to be.
00:34:37.344 --> 00:34:46.432
And, you know, there's all sort of the standard metrics that we look at around either done, rule of 40, retention metrics and that sort of thing.
00:34:46.552 --> 00:34:56.641
And there could be other measures that are, that are particular to the company and the situation around the product mix or the markets that they play in and that sort of thing.
00:34:56.722 --> 00:35:00.324
So that's what you have to focus on is achieving those.
00:35:01.847 --> 00:35:06.351
The timeline is important though, because it forces a sense of urgency.
00:35:06.572 --> 00:35:08.313
You have no time to waste.
00:35:08.414 --> 00:35:12.336
And so that's why that making the big changes early.
00:35:12.356 --> 00:35:25.067
And sometimes you're going to be underwriting a significant investment to grow And you want to do that early days, right?
00:35:25.106 --> 00:35:26.811
You don't want to do that in the out years.
00:35:27.090 --> 00:35:31.260
So you're going to be more focused on in the out years.
00:35:31.320 --> 00:35:36.452
So if you're going to be taking a hit and spending a lot, you're going to do that in the first couple of years.
00:35:36.731 --> 00:35:38.757
So you have to be ready for that.
00:35:38.936 --> 00:35:39.358
Right.
00:35:39.521 --> 00:35:45.110
And let me ask you, I can't do a podcast without mentioning the impact of AI.
00:35:45.130 --> 00:35:48.396
Are you using any of that in your due diligence process?
00:35:49.577 --> 00:35:51.942
Have you built an agent to do some due diligence?
00:35:52.402 --> 00:35:54.887
I have
00:35:54.927 --> 00:35:56.009
not been replaced by AI
00:35:56.608 --> 00:35:56.670
yet.
00:35:57.130 --> 00:36:01.918
No, of course not you, because there's all the people interviewing you still have to do it.
00:36:02.626 --> 00:36:10.202
Yeah, so we do so in some limited ways, but it's not sort of core to our process yet.
00:36:10.882 --> 00:36:11.184
Okay.
00:36:11.244 --> 00:36:31.088
But because I have a lot of experience applying AI both to business operations and to technology, And I see what the potential is and being able to aggregate knowledge obtained from a variety of sources and being able to interrogate it in a way that gives you meaningful answers is useful.
00:36:31.268 --> 00:36:33.231
And, you know, that's what we're doing.
00:36:33.271 --> 00:36:40.603
And so leveraging LLMs and leveraging agents to help with that is certainly, like, the potential.
00:36:40.704 --> 00:36:44.414
And I imagine that there are other PE firms that are doing that.
00:36:44.434 --> 00:36:48.704
And there's certainly lots of solutions providers that are building such systems.
00:36:49.447 --> 00:36:53.297
How many agent sellers are you seeing a day?
00:36:53.889 --> 00:36:55.510
I don't
00:36:55.530 --> 00:36:58.554
know, because I have an agent that weeks them out.
00:36:58.574 --> 00:37:00.215
Exactly.
00:37:00.615 --> 00:37:01.496
Yeah, a lot.
00:37:01.777 --> 00:37:06.340
You know, AI is sort of on everybody's mind.
00:37:06.380 --> 00:37:11.965
It's on the mind of the LPs that are, you know, investing in the funds that we are deploying.
00:37:12.005 --> 00:37:15.909
It's certainly in the minds of the operators.
00:37:16.208 --> 00:37:19.172
And it's, you know, it has to be in the minds of the companies.
00:37:19.192 --> 00:37:23.856
And part of that is like, you know, how does that impact your thesis, right?
00:37:23.856 --> 00:37:32.092
So now, if you're not contemplating leveraging AI or putting AI at the center of your offering, you're probably behind.
00:37:32.132 --> 00:37:42.014
And so it factors pretty much into every thesis, every acquisition that we make, and certainly into the companies that we already own as part of our portfolio.
00:37:42.722 --> 00:37:44.603
It's front and center.
00:37:44.923 --> 00:37:55.793
And obviously it's like table stakes that you're using AI for Code Assist and for all of these other things using Copilot or OEM or something like that.
00:37:55.813 --> 00:37:58.476
You're using Cursor or Windsor for one of these tools.
00:37:58.695 --> 00:38:00.858
That's just sort of the assumption now.
00:38:01.237 --> 00:38:08.184
And obviously it's not always evenly applied, but on us to make sure that we're getting the full value there.
00:38:09.065 --> 00:38:09.144
Okay.
00:38:09.184 --> 00:38:09.264
Yeah.
00:38:09.284 --> 00:38:13.452
Somebody said, I'll happily get my 450 bucks an hour to Yeah, right.
00:38:13.512 --> 00:38:17.152
Yeah,
00:38:17.353 --> 00:38:18.380
exactly.
00:38:18.420 --> 00:38:20.190
You're my code, yeah.
00:38:20.449 --> 00:38:23.153
Um, but, uh, yeah.
00:38:23.474 --> 00:38:24.014
Um,
00:38:24.396 --> 00:38:28.802
uh, yeah, that's, that's legit.
00:38:28.882 --> 00:38:29.141
Right.
00:38:29.181 --> 00:38:38.556
How do you sort of turn something that you effectively rapid prototypes using cursor into something that will scale into a multi-tenant SAS solution.
00:38:38.735 --> 00:38:39.056
Right.
00:38:39.396 --> 00:38:47.809
So, but you can't deny the impact that very quickly without having to write the code directly longhand.
00:38:48.750 --> 00:38:48.829
Yeah.
00:38:49.250 --> 00:38:52.938
Being able to prompt up a functional POC.
00:38:52.978 --> 00:38:53.885
Yeah.
00:38:54.306 --> 00:38:59.811
You know, it involves stakeholders and even customers and that sort of thing to shape it.
00:38:59.990 --> 00:39:02.693
Having something that actually works is profound.
00:39:02.833 --> 00:39:15.304
And, you know, it's sort of a logical progression from having, you know, like high fidelity prototypes to now like clickable prototypes that sort of behave, you know, pretend to behave.
00:39:15.483 --> 00:39:18.067
And now it's like actually the application, right?
00:39:18.186 --> 00:39:30.579
And because our interaction, sort of our expectations of how we interact with software is changing with agents, it actually kind of shifts the focus away from presentation and more on interaction.
00:39:30.699 --> 00:39:31.539
Right, right.
00:39:31.559 --> 00:39:33.422
And so let me ask you a business question around that.
00:39:34.041 --> 00:39:43.693
You know, there's the famous quote from, I think it was from Sasha Nadella, who said that SaaS is going to die through agents now because, you know, vertical SaaS anyway.
00:39:44.293 --> 00:39:44.634
Yeah.
00:39:44.833 --> 00:39:48.458
And how are you seeing that, A, with your portfolio and B, generally?
00:39:48.858 --> 00:39:49.298
Yeah.
00:39:49.338 --> 00:39:52.742
So provocative statement, which SaaS is a big word.
00:39:53.043 --> 00:39:56.206
So I don't know if my if I'm going to apply it that broadly, but certainly
00:39:56.266 --> 00:39:57.186
vertical SaaS.
00:39:57.206 --> 00:39:58.528
I mean, think about it.
00:39:58.889 --> 00:40:02.773
It's an attribute on a database and agents can go across databases.
00:40:02.972 --> 00:40:16.668
So there's certainly categories of SaaS applications that are sort of workflow built around other systems of record that lend themselves to like crime for disruption with a general workflows.
00:40:17.007 --> 00:40:34.320
And so if you find yourself investing in or building a system that can be replaced by agentic workflows, you should be looking on how you get into the agentic workflow business and out of the business that you've spent potentially decades.
00:40:35.233 --> 00:40:48.869
So it definitely impacts how we view investment opportunities, and it does impact the role that the systems that our portcodes build, how they play in that world.
00:40:49.231 --> 00:40:53.596
So it used to be the case like, well, your application has to have an API, right?
00:40:53.675 --> 00:40:58.681
It has to be connected, programmatically accessible in a larger ecosystem.
00:40:59.101 --> 00:41:02.186
That's been true for well over a decade.
00:41:02.530 --> 00:41:04.733
Now, that's not good enough, right?
00:41:04.793 --> 00:41:14.932
You have to expose capabilities that can be leveraged by an agent that may be working across multiple systems like your own, and you have to be able to plug into that.
00:41:15.233 --> 00:41:21.626
Or potentially you're building the agents that are leveraging different systems that do specific work.
00:41:21.985 --> 00:41:23.829
And so it's a different pattern.
00:41:24.481 --> 00:41:26.911
model to be thinking about.
00:41:27.112 --> 00:41:28.880
And other people are thinking about that.
00:41:28.920 --> 00:41:31.510
So if you're not, then you're probably
00:41:31.530 --> 00:41:31.630
wrong.
00:41:31.650 --> 00:41:32.132
Roadkill.
00:41:32.454 --> 00:41:32.614
Yeah.
00:41:33.356 --> 00:41:33.498
Yeah.
00:41:33.699 --> 00:41:34.141
Interesting.
00:41:34.422 --> 00:41:34.864
Interesting.
00:41:35.777 --> 00:41:43.284
So in the last while, have you changed your thesis as a result of the advances in AI?
00:41:43.425 --> 00:41:44.485
I think we've refined it.
00:41:44.885 --> 00:42:01.559
And basically there's an AI component to not just the criteria that we used when evaluating companies that we might potentially acquire, but thinking about the role that they might play in a largely agentic world.
00:42:01.780 --> 00:42:10.070
Also sort of expectations about the velocity of software development.
00:42:10.471 --> 00:42:24.010
And so we may look at a company that has a very large engineering team and the first thing that we'll think about is like, if we're able to apply AI more significantly, what would this team look like?
00:42:24.449 --> 00:42:32.637
And sometimes it's not just like, oh, we could reduce the headcount here, but it may actually change the people who participate in product development.
00:42:32.657 --> 00:42:34.478
Right, right, right, right.
00:42:34.619 --> 00:42:37.440
Or you just use that engineering team and scale with AI.
00:42:38.242 --> 00:42:39.063
You could, yeah.
00:42:39.103 --> 00:42:45.407
So it also may give you broader capabilities to pursue more things or pursue things faster, for sure.
00:42:45.427 --> 00:42:45.688
Right.
00:42:45.869 --> 00:42:48.050
Well, listen, David, it's been great to talk to you.
00:42:48.070 --> 00:42:57.922
I appreciate all your insights and for voting for what's going to happen and helping our audience out understand what you're looking for when you're doing these due diligence processes.
00:42:58.003 --> 00:43:01.148
And perhaps they can shape up in advance of meeting you.
00:43:01.329 --> 00:43:05.938
You've got a great reputation, both yourself and your organization within the tech community.
00:43:05.978 --> 00:43:10.527
So congratulations on the portfolio you've built and the rewards you're gaining from it.
00:43:10.606 --> 00:43:12.391
So thank you very much for joining us today.
00:43:12.510 --> 00:43:13.192
Thank you, Sean.
00:43:13.253 --> 00:43:14.414
Thanks for the opportunity to
00:43:14.434 --> 00:43:14.514
talk.
00:43:14.835 --> 00:43:15.016
All right.
00:00:00.194 --> 00:00:08.086
Welcome to another episode of Growing Pains, where we help entrepreneurs and founders who are considering funding get prepared for what that funding brings.
00:00:08.367 --> 00:00:12.333
And I'm here today with David Raleigh, an operating partner with Diversus Capital.
00:00:12.452 --> 00:00:20.685
They have about 1.7 billion AUM and are currently investing out of a$680 million discretionary fund, institutional fund.
00:00:20.986 --> 00:00:27.696
What I love about Diversus is their focus on software and technology companies, especially in the enterprise and B2B space.
00:00:28.801 --> 00:00:33.125
and the quality of their value creation team with operating partners like David.
00:00:33.426 --> 00:00:35.548
It's also the size of their operating partner team.
00:00:36.249 --> 00:00:42.615
It's rare that you have such quality and size in a mid-market private equity firm.
00:00:42.774 --> 00:00:45.237
And so Diversus is definitely a great company to deal with.
00:00:45.457 --> 00:00:55.067
David, as leader in the technology side of the operating partners, is responsible for both due diligence and post acquisition transitions.
00:00:55.226 --> 00:01:07.692
David is here to tell us everything we should know about how to prepare ourselves for growth equity or an exit with a private equity company with the sophistication of diverses capital.
00:01:08.373 --> 00:01:09.736
David, welcome to the podcast.
00:01:09.995 --> 00:01:15.001
So I guess the first question is, can you describe a bit about your specific thesis in this?
00:01:15.182 --> 00:01:15.503
Sure.
00:01:15.822 --> 00:01:25.754
So when a PE firm is considering acquiring a company, a platform, so primary acquisition, the thesis isn't firm at that point.
00:01:25.894 --> 00:01:36.933
So we might have an idea about the potential that the company might have given sort of the market conditions, how the market's growing relative to competition.
00:01:36.972 --> 00:01:41.417
Is the total addressable market sufficiently large, growing?
00:01:41.456 --> 00:01:47.683
And do we feel like the company has the potential to sort of expand there?
00:01:49.563 --> 00:01:55.168
But at the beginning, we're not exactly sure how or whether that might be the case.
00:01:55.289 --> 00:02:25.013
So during the diligence process, we're exploring a lot of different things we're looking at sort of the overall the tam so we understand sort of the where where the company plays and what the potential is but we also care about market dynamics we care about the competitive dynamics we obviously care about the performance of the company up until that point and so there are a lot of factors now technology plays a big role uh Generally, as you mentioned, Diversus is looking at software companies.
00:02:25.473 --> 00:02:27.354
So technology is kind of core to that.
00:02:27.574 --> 00:02:32.539
And in some cases, we're looking to acquire companies that have been built up over many years.
00:02:32.620 --> 00:02:35.282
And so there could be a lot of legacy technology.
00:02:35.361 --> 00:02:37.663
So that has to factor into our thesis.
00:02:37.883 --> 00:02:51.376
If we're investing in a growth thesis, let's say, like we believe that the company has an opportunity to grow and expand to take up more of that pie or take on an adjacent pie, then is the technology going to be an asset?
00:02:51.376 --> 00:02:53.278
asset or is it going to be a liability?
00:02:53.639 --> 00:03:03.358
And so even without sort of making judgments about, you know, is it purely good technology or purely bad technology, it's never that simple.
00:03:03.497 --> 00:03:08.667
It's just how would the technology sort of support that thesis if there is a growth thesis.
00:03:09.669 --> 00:03:10.110
Okay.
00:03:10.370 --> 00:03:26.903
Other PE firms have sort of a different approach and they're primarily looking at how they can optimize the operation of the business because they might believe that there's sort of inefficiencies built into the way that the company is operated.
00:03:27.284 --> 00:03:31.008
And so you're looking for ways to achieve those sorts of economies.
00:03:31.288 --> 00:03:34.711
And in that case, the technology can play a role there.
00:03:34.790 --> 00:03:41.637
Does the technology inherently incur a certain operational burden that you might have to address.
00:03:41.717 --> 00:03:55.671
And you might have to address that by re-platforming or dealing with tech debt or something like that, or simply changing the way the company goes about doing the business of building and delivering their product to their customers.
00:03:55.692 --> 00:03:59.036
So that is not your MO to go fix broken technology companies?
00:03:59.316 --> 00:03:59.616
Oh, there's
00:03:59.637 --> 00:04:01.438
always an aspect of that, right?
00:04:01.519 --> 00:04:07.985
So firms are looking for good deals and opportunities to create value over a relatively short period of time.
00:04:08.006 --> 00:04:10.625
And so if a company or It was like...
00:04:10.913 --> 00:04:22.269
killing it and just like a really high achiever and there's not really a lot that we think we could do in that period of time, then even though it might be a great company, it might not be a good deal for us, right?
00:04:22.348 --> 00:04:26.233
It's not a good opportunity to create a significant value.
00:04:26.375 --> 00:04:33.564
So even though we might be investing in a growth thesis, typically there's work to be done on the technology to achieve.
00:04:33.723 --> 00:04:34.064
Okay.
00:04:34.264 --> 00:04:40.894
And then, so that sounds like the thesis follows the opportunity to acquire a company, right?
00:04:40.898 --> 00:04:44.665
as opposed to a thesis and trying to fit companies into that thesis?
00:04:44.927 --> 00:04:50.319
Yeah, there will be a general thesis based on, you know, what we perceive as the company potential.
00:04:50.358 --> 00:04:55.930
But I can tell you that during the diligence process, it's a participatory exercise, right?
00:04:56.009 --> 00:05:01.399
So it's not just led by the deal team or sort of on the investment side.
00:05:01.439 --> 00:05:07.769
Operators and advisors and consultants who know something about the face are contributing to that.
00:05:07.928 --> 00:05:19.860
And so we're formulating the thesis and we're building a model that represents the kind of investment, the kinds of changes that we think would need to happen to achieve a particular outcome.
00:05:20.139 --> 00:05:26.649
Now we have sort of general ideas about what would look good at the end that we would want to achieve.
00:05:26.930 --> 00:05:29.894
And so the thesis is really like, so how are you gonna get there?
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And what's it gonna take to get there?
00:05:33.459 --> 00:05:37.345
So those aspects of it just become clarified.
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And we have to get to a level of clarity and conviction before we make the decision to invest.
00:05:44.225 --> 00:05:44.586
Right.
00:05:44.766 --> 00:05:55.189
And some companies actually have work with the team that they're looking at acquiring and actually walk through what their plan is for that company as part of the pre-acquisition phase.
00:05:55.410 --> 00:05:57.072
Is that your process as well?
00:05:57.213 --> 00:06:02.345
So there's certainly, you know, we're asking them to open the Komodo, right?
00:06:02.625 --> 00:06:03.005
Yeah.
00:06:03.362 --> 00:06:09.586
But at the same time, you want to avoid introducing bias into the conversation at that point.
00:06:09.908 --> 00:06:17.254
And you want to sort of get to the truth so that you can decide, you know, make decisions about what it would take to achieve the outcome you're after.
00:06:17.413 --> 00:06:21.817
So we don't want to telegraph an answer and then sort of hear that back.
00:06:22.077 --> 00:06:28.644
So there's a certain level of sort of trying to avoid introducing that kind of bias.
00:06:29.064 --> 00:06:43.098
We try to be forthcoming about what the opportunity looks like because, you know, we We want to understand, especially as we're talking to the leadership team, our members of the leadership team during that diligence process, what role they might play in helping us achieve
00:06:43.298 --> 00:06:43.338
it.
00:06:43.358 --> 00:06:43.519
Right.
00:06:43.879 --> 00:06:44.100
Okay.
00:06:44.319 --> 00:06:52.869
And you talked, I want to go back to the market size and the TAM because it doesn't seem like a clamp on strategy for you guys in enrolling into a market.
00:06:53.088 --> 00:07:01.158
It seems like you're picking verticals, SaaS verticals and sticking and letting that company grow within that as opposed to amalgamating a whole bunch of companies.
00:07:01.237 --> 00:07:02.059
Is that a fair statement?
00:07:02.298 --> 00:07:07.307
Yeah, that's generally true of diverses, obviously that's not true of a lot of other PE firms.
00:07:08.194 --> 00:07:18.382
One thing I've learned sort of working on the PE side and talking to other folks and other PE firms is like no two PE firms are exactly alike, right?
00:07:18.442 --> 00:07:22.146
And they may have very significant differences in their approach.
00:07:22.485 --> 00:07:27.730
And so some might approach it by looking to do roll-ups of different assets that are brought together.
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Typically we're looking for a solid platform and certainly M&A and adding on could be part of that thesis and how we achieve what we want.
00:07:38.160 --> 00:07:38.910
Right.
00:07:39.105 --> 00:07:45.350
It's rarely the case that we go into a transaction pulling together multiple parties.
00:07:45.531 --> 00:07:52.637
That can happen, it's just not, it hasn't been our experience primarily, where other PEs may do that exclusively.
00:07:52.778 --> 00:07:53.038
Right.
00:07:53.237 --> 00:07:53.658
Yeah, yeah.
00:07:53.738 --> 00:08:05.028
So that's the federation of, and sometimes it's a federation of companies, and sometimes they're looking for synergies across those portfolio companies that they can bring the best of breed and reduce operating costs.
00:08:05.329 --> 00:08:09.012
We like to have sort of a solid foundation.
00:08:09.072 --> 00:08:27.959
So even though a company that we acquire might not be able to get us where we need to go by themselves, just by sort of investing organically into the company, we typically don't sort of handicap a deal by saying like, well, it's only worth investing this company if you also get this company or these other companies.
00:08:28.279 --> 00:08:33.005
So, but that's just, you know, again, other PE firms might do that exclusively.
00:08:33.066 --> 00:08:34.788
That might be their primary approach.
00:08:35.089 --> 00:08:36.471
And we may do that in the future.
00:08:36.631 --> 00:08:38.173
So, you know, but...
00:08:38.594 --> 00:08:42.398
But for the most part, we're looking for a solid platform to build on.
00:08:42.850 --> 00:08:43.230
Okay.
00:08:43.410 --> 00:08:52.501
And unlike Venture, which is always looking for the moonshot to cover their portfolio of losses and other fundings, what is your approach to that company?
00:08:52.542 --> 00:08:56.687
So, I mean, I don't want to pick on any specific company, but I happen to use RoadMonk, right?
00:08:56.907 --> 00:09:06.097
And RoadMonk is interesting because it's a much simpler user experience in terms of using an Asana type of product, but it's not Asana, right?
00:09:06.217 --> 00:09:08.201
So it's not a moonshot.
00:09:08.260 --> 00:09:12.125
It's got a very specific niche for the early adopter, I guess, in that space.
00:09:12.738 --> 00:09:16.586
And Roadbunk was an add-on to Tempo.
00:09:17.066 --> 00:09:26.865
So it was part of building out and rounding out a larger strategic portfolio management capability that Tempo represented.
00:09:27.457 --> 00:09:27.878
Okay.
00:09:27.898 --> 00:09:31.020
So it was not acquired to be a standalone platform.
00:09:31.421 --> 00:09:34.844
It was adjunct to a platform that had already been.
00:09:35.065 --> 00:09:35.485
Interesting.
00:09:35.625 --> 00:09:35.945
Okay.
00:09:36.125 --> 00:09:36.586
Interesting.
00:09:36.765 --> 00:09:43.351
So that, so then that begs the question when you bring in, so you look at the company and look at the team, you're doing due diligence.
00:09:43.552 --> 00:09:49.736
You've got a great article that you posted a while ago about how you shouldn't look at the spot in time that you're acquiring.
00:09:49.777 --> 00:09:51.678
You should look at the evolution of that technology.
00:09:51.879 --> 00:09:53.340
Can you share with us some of those insights?
00:09:53.701 --> 00:09:53.980
Sure.
00:09:54.160 --> 00:09:58.345
So, so oftentimes when I brought in to do tech technical diligence.
00:09:58.664 --> 00:10:07.995
I will be engaging with the principle, you know, the technical principles at the company and they will show me basically a snapshot of where they are right now.
00:10:08.436 --> 00:10:13.360
And that's interesting, but I'm not, you know, I'm not buying into a static asset, right?
00:10:13.721 --> 00:10:20.327
I want to understand how it got there and the decisions that were made that led to what it is because it's never perfect, right?
00:10:20.448 --> 00:10:22.890
It's like you're adapting to changing conditions.
00:10:23.331 --> 00:10:28.523
You're sort of applying yourself to your best ability given the resources that you have available.
00:10:28.663 --> 00:10:32.849
And so I want to know the backstory to understand what I'm looking at.
00:10:33.090 --> 00:10:38.875
And that tells me a little bit of something about where it could go and how hard it might be to get there.
00:10:39.274 --> 00:10:47.081
But it also tells me a little something about you as a technical leader being able to tell that story and provide me that narrative.
00:10:47.261 --> 00:10:59.673
So I want to feel convinced that you have a deep enough understanding of the path that got you to the snapshot that I'm looking at today so that you can help get it to the next thing.
00:10:59.893 --> 00:11:07.001
And sometimes it's like I feel really good about what you have to say and And I totally understand the trade offs that you made that led to what we have today.
00:11:07.062 --> 00:11:12.870
And that would sort of inform maybe how we would build on that or leverage that experience.
00:11:13.110 --> 00:11:19.860
Other times it may be clear that like you weren't really involved and maybe you're not part of the picture going forward.
00:11:21.153 --> 00:11:32.513
So it's both a way for me to get an understanding of this complex asset that is the technology, but also it tells me a little bit of something about the technical leadership.
00:11:32.633 --> 00:11:32.873
It's really
00:11:33.013 --> 00:11:37.019
interesting because that story can be read different ways, right?
00:11:37.139 --> 00:11:40.725
In your agile development process, you're always tinkering and changing.
00:11:41.346 --> 00:11:45.433
That leads to the evolution of the product.
00:11:45.857 --> 00:11:47.462
Yeah, yeah.
00:11:47.482 --> 00:11:48.666
So what are you looking
00:11:48.686 --> 00:11:51.173
for in the storytelling of those iterations?
00:11:51.394 --> 00:12:00.813
Yeah, typically along the way, the path is punctuated by you know, hitting roadblocks and having to architect beyond them.
00:12:01.173 --> 00:12:11.982
And so, so I want to understand what was the last roadblock you hit and then how you sort of dealt with it, because almost certainly you're going to hit another roadblock at some point down the line.
00:12:12.123 --> 00:12:15.505
And I might be very involved in that experience.
00:12:15.566 --> 00:12:19.690
So I want to understand sort of how you went about assessing your options.
00:12:20.090 --> 00:12:21.270
Did you see it coming?
00:12:21.731 --> 00:12:22.712
Do you know what to do?
00:12:22.932 --> 00:12:26.735
And frankly, it's like, I want to know, do you see the next roadblock?
00:12:26.735 --> 00:12:29.619
Like you should be able to identify because it's there.
00:12:29.658 --> 00:12:30.659
It's always there, right?
00:12:31.061 --> 00:12:38.528
And you should be able to tell me like, well, when we scaled at this point, I know that I'm going to have to revisit the architecture around some component up here.
00:12:38.889 --> 00:12:44.033
And so here's what I'm looking at to tell me when I'm getting close so that I can begin that work.
00:12:44.235 --> 00:12:54.806
And it's frankly, even as scary as that potential roadblock might be, it's comforting to know that like you can see it and you have a plan for addressing it.
00:12:54.926 --> 00:12:58.913
That's actually says a lot to me about your ability
00:12:58.974 --> 00:12:59.956
to help growth.
00:13:00.056 --> 00:13:05.068
Have you ever faced a situation where that was just selling themselves, but they really didn't?
00:13:05.450 --> 00:13:08.236
They were more like firefighters in their gut.
00:13:08.537 --> 00:13:10.201
They're not solution architects.
00:13:10.913 --> 00:13:14.657
Yeah, so there's a couple of ways to address that.
00:13:14.777 --> 00:13:19.701
So one thing is like, they don't know what they don't know, and you can sort of get to that.
00:13:19.841 --> 00:13:29.610
And if you have sort of an understanding of architectural patterns and the inherent limitations with different approaches, you can kind of see whether they recognize that or not.
00:13:29.710 --> 00:13:31.152
So that tells me something.
00:13:31.371 --> 00:13:46.210
If there's sort of patterns of behavior that suggest that decisions around, architectural decisions are being driven kind of singularly and The team is generally made up of people who take the hits and just implement what they're told.
00:13:46.250 --> 00:13:48.794
That's a limitation unto itself, right?
00:13:48.835 --> 00:13:55.148
Because that means that I'm putting a lot of emphasis and pressure on the one person who sort of sees the big picture.
00:13:57.153 --> 00:13:57.995
And that's a lot.
00:13:58.095 --> 00:14:06.802
I would rather have a smaller, more actively, a team that's more actively involved in the solution space who's contributing to that.
00:14:07.003 --> 00:14:31.907
And so that's a tough one to assess, certainly during the very concentrated period of doing diligence, but it's certainly something that you strive to understand, if not before a transaction, very closely afterwards, because it may affect the very makeup of the team and you might have to rebuild this team with a different kind of resource than has been there in the past
00:14:32.147 --> 00:14:53.197
yeah those are really tough calls to make i'm sure and i guess what you know we've done a fair amount of due diligence on existing teams when we help companies refactor and stuff and we do find those scenarios where you've got a firefighter you just love whose importance is the firefight you put out all the fires with a new product They're out of a job, it feels like, and they resist it.
00:14:53.418 --> 00:14:55.600
How do you deal with that transition when you're...
00:14:55.740 --> 00:15:01.889
I mean, obviously, you've got a much bigger stake in the company, so you can be pretty prescriptive, but you also don't want to lose the whole engineering team.
00:15:02.109 --> 00:15:10.058
And there might be a lot of gold in the Nara Hills where the engineering team has been doing tickets, but they really want to do more solutions engineering.
00:15:10.599 --> 00:15:10.960
Yeah.
00:15:11.100 --> 00:15:11.279
How
00:15:11.299 --> 00:15:11.640
do you
00:15:11.681 --> 00:15:12.282
transition there?
00:15:13.022 --> 00:15:14.985
So there's no superficial way to do that.
00:15:15.085 --> 00:15:18.009
Like, you have to, as quickly as possible...
00:15:19.201 --> 00:15:24.928
you know, talk to and get to know and assess everybody down to the individual contributor.
00:15:25.048 --> 00:15:37.624
Like you have to gain a direct opinion on the strengths and weaknesses of the team, not just at the leadership level, but sort of all the way out to individual contributors who are writing code.
00:15:38.465 --> 00:15:38.585
Wow.
00:15:39.025 --> 00:15:42.190
So that's a big investment of time to do that.
00:15:42.690 --> 00:15:44.611
And time's wasted.
00:15:44.631 --> 00:15:46.633
You don't have a lot of time to waste to get there.
00:15:46.692 --> 00:15:50.336
But there's no way around it.
00:15:50.376 --> 00:15:52.258
So there's no shortcuts to doing that.
00:15:52.457 --> 00:15:54.100
Here's something to consider, though.
00:15:54.340 --> 00:15:56.861
It depends a lot on our thesis, right?
00:15:56.942 --> 00:16:17.600
So if we're going to grow or if we're sort of underwriting significant growth and potentially changing to address an adjacent market, let's say, or sort of exploit a part of the market that they're already in more fully than they do now, or going up market or something like that, Getting stuck in firefighting mode, you could just spend all of your time just sort of spinning that wheel.
00:16:17.640 --> 00:16:18.686
Right.
00:16:19.009 --> 00:16:26.275
And so if it's the case that I need to make some substantial changes, that would be sort of a red flag for me.
00:16:26.375 --> 00:16:43.691
Like if they're really stuck in that firefighting mode or just sort of tactically being responsive to issues that they are now, I'll probably have to introduce a different kind of leadership that is thinking more holistically about how we grow or change to exploit a market that we don't right now.
00:16:44.032 --> 00:16:45.393
So that happens.
00:16:45.613 --> 00:16:58.166
That begins to happen on your first call during the So you're already starting to form an opinion about the capabilities and limitations of the mindset of the folks that are on board.
00:16:58.365 --> 00:17:09.877
Because in a very short period of time, post-transaction, you have to put in place a plan for how you're going to potentially reshape the organization to execute against the plan that makes
00:17:09.897 --> 00:17:09.938
up.
00:17:09.958 --> 00:17:10.278
Right.
00:17:10.578 --> 00:17:13.021
So we'll go into the first hundred days in a minute.
00:17:13.201 --> 00:17:21.972
But going back to that, so if you were to look at your due diligence process, how much, I mean, technically, technology is easier to fix than people, right?
00:17:23.415 --> 00:17:24.817
Generally true, yes.
00:17:24.837 --> 00:17:26.661
I would say that's true.
00:17:26.862 --> 00:17:33.032
It's pretty blatant fact or not fact, whereas people issues are much more nuanced.
00:17:33.053 --> 00:17:40.526
So you must become also not just a technical due diligence guy, but also very much a people reader.
00:17:41.057 --> 00:17:41.518
Yeah.
00:17:41.638 --> 00:17:45.561
Is that an acquired skill or is that something that you've always had intuitively?
00:17:45.801 --> 00:17:51.926
Well, that's tough to say, but it's certainly important to be able to do it effectively.
00:17:52.028 --> 00:17:56.951
When I do technical diligence, I'm looking at a handful of areas.
00:17:57.031 --> 00:18:03.857
So obviously I'm looking at the architecture, its ability to scale, baggage that it might carry, that sort of thing, limitations there.
00:18:03.917 --> 00:18:09.522
I'm also looking at the data architecture for similar concerns and that sort of thing.
00:18:09.583 --> 00:18:16.289
And I'm looking at those things with what the potential thesis might be about where we need to take this thing.
00:18:16.690 --> 00:18:24.057
But I'm also looking at sort of their software development lifecycle and how they go about the business of building software and how that works.
00:18:24.478 --> 00:18:35.871
I will look at artifacts that are part of that process to see for myself how well they are at communicating ideas and initiatives and how that turns into work that's executed by the team.
00:18:36.391 --> 00:18:39.453
I'll look at the organizational structure in particular.
00:18:39.554 --> 00:18:43.882
I'll look at the relationships between engineering and product.
00:18:44.082 --> 00:18:46.527
That's sort of the foundational relationship.
00:18:46.807 --> 00:18:55.045
And I'm looking for sort of anomalies that would potentially limit their ability to execute effectively.
00:18:55.384 --> 00:18:57.229
So what do you mean by that?
00:18:57.589 --> 00:18:59.272
Yeah, so if they're...
00:18:59.746 --> 00:19:14.241
If they operate in a very disjointed way and there's sort of any evidence of finger pointing or us versus them or anything like that, that's going to get in the way of the progress that needs to be made.
00:19:14.442 --> 00:19:27.957
So I want clarity about how requirements and initiatives come into being, how they're expressed, how they're conveyed, the role that the engineering team plays in coming up with solutions.
00:19:29.026 --> 00:19:31.385
It's being told just, you know, implement
00:19:31.426 --> 00:19:31.891
this thing.
00:19:32.355 --> 00:19:34.109
Once you got to build it next month, right?
00:19:34.337 --> 00:19:34.698
Yeah.
00:19:35.778 --> 00:19:40.363
Or, yeah, or like, I'm going to tell you how to build this thing, you know, so I'm looking for there.
00:19:41.344 --> 00:19:46.969
I'm looking at sort of how what their testing approach is.
00:19:47.630 --> 00:19:58.298
And I say testing approach versus like how they do QA, because QA can sometimes be just like limited to a title or department of people.
00:19:58.519 --> 00:20:01.060
And typically testing is broader than that.
00:20:01.501 --> 00:20:05.605
So I'm looking at sort of holistically how they Think about testing.
00:20:05.965 --> 00:20:11.654
Testing is also, you know, is this feature that we're developing delivering value, right?
00:20:11.714 --> 00:20:15.559
So I need a test hypothesis about value delivery.
00:20:15.660 --> 00:20:17.222
And so how do they go about doing that?
00:20:17.682 --> 00:20:28.097
So I'm interested in sort of the overall interaction and sort of the way that they work together to achieve a specific, you know, outcome.
00:20:28.318 --> 00:20:28.499
The
00:20:28.699 --> 00:20:33.132
other thing I looked at, Before you leave that, because that's very interesting.
00:20:33.672 --> 00:20:38.636
Because usually you're testing technically whether it's going to take the load capacities and not break, et cetera.
00:20:38.797 --> 00:20:40.239
You're not testing value.
00:20:40.338 --> 00:20:46.704
The value should have been pre-tested by customer success teams that talk to product or sales team that talk to product.
00:20:46.904 --> 00:20:47.444
How do you...
00:20:47.505 --> 00:20:59.576
But if you're defining a capability that you think was going to deliver value, and maybe it's going to deliver value to sell more software or reduce your...
00:21:01.122 --> 00:21:09.520
retention and that sort of thing, or to open up a new market segment that depends on that capability.
00:21:09.560 --> 00:21:18.382
So as you conceive of that, you start to think about like, well, how will I know whatever I come up with actually is effective at achieving that?
00:21:18.657 --> 00:21:29.851
So you need to sort of build into your planning process and your development process the things you're going to measure that will tell you whether you got it right or not.
00:21:30.251 --> 00:21:33.496
And I want to see that kind of thinking early on.
00:21:33.655 --> 00:21:43.166
And sometimes you can find it in the artifacts that get generated, in the PRDs and the epics and the user stories and the accepted criteria that's associated there.
00:21:43.207 --> 00:21:45.470
And how much are they thinking about that?
00:21:45.602 --> 00:21:53.729
Now, I have to tell you that it's rare that I find that that practice is fully embraced by product development teams.
00:21:54.108 --> 00:22:00.515
But it's certainly, I think, important to a high-functioning team that's going to deliver value and able to iterate on it.
00:22:00.595 --> 00:22:02.957
So it's sort of the essence of being agile.
00:22:04.498 --> 00:22:12.545
And if that's going to be important to what we're trying to achieve with this company, then I have to assess what it will take to get that company there.
00:22:12.766 --> 00:22:15.567
And it might affect their philosophy of how they do things.
00:22:15.567 --> 00:22:20.798
that it might affect the makeup of the teams that are involved.
00:22:21.057 --> 00:22:27.928
The last point I'll make about organizational design that is part of my diligence process and why it matters.
00:22:28.308 --> 00:22:31.594
So I think we all know about Conway's Law, right?
00:22:31.653 --> 00:22:41.628
So Conway's Law suggests that an artifact generated by an organization resembles sort of the communication channels and the structure of that organization.
00:22:41.949 --> 00:22:47.176
So more simply stated, like teams tend to build software that looks like themselves, right?
00:22:48.066 --> 00:22:54.653
If you have two teams working independently, they will generally create two things that are independent of each other.
00:22:55.053 --> 00:23:06.284
And so I'm looking for the impact of Conway's Law or how Conway's Law manifests in the artifacts that an organization has created.
00:23:06.505 --> 00:23:15.794
And in some cases, it's like well-considered and it's like, yep, that's exactly what we want and the organization is well-suited to delivering that.
00:23:16.354 --> 00:23:26.992
But in other cases, the objective might be to integrate two systems or to bring things together, and yet the organization is structured in such a way that that's not natural.
00:23:27.266 --> 00:23:30.589
And so Conway's Law will have an impact on that.
00:23:30.730 --> 00:23:41.284
So I'm looking for the telltale signs of how Conway's Law is affecting the artifacts that are produced, the products that are produced, and whether that needs to change.
00:23:41.584 --> 00:23:42.065
Interesting.
00:23:42.244 --> 00:23:55.321
So let me guess, when you have that singular architect who's the firefighter, that person has hired people very similar to he or she, or to be subservient to that person, and you have a very bad...
00:23:56.385 --> 00:23:58.689
ConwayLaw.com in that respect.
00:23:58.749 --> 00:23:59.951
Is that consistent?
00:24:00.510 --> 00:24:01.211
It depends.
00:24:01.833 --> 00:24:03.174
That's a little bit different.
00:24:03.234 --> 00:24:13.769
So Conway's Law would be more directly associated with the team that's actually delivering, like building out whatever that architect might be sort of describing, dictating.
00:24:14.789 --> 00:24:20.458
I think there's a different kind of bias you get when you have sort of singular control over architectural vision.
00:24:20.961 --> 00:24:27.715
Now you're putting a lot of, you're betting a lot on that architect getting it right.
00:24:28.135 --> 00:24:34.409
And perhaps you're not leveraging the input and capabilities of other people.
00:24:34.509 --> 00:24:36.673
So it's kind of a single point of failure.
00:24:37.089 --> 00:24:42.759
which we always try to avoid in anything that we build or any organization that we create.
00:24:43.179 --> 00:24:53.715
So we look for and try to eliminate single points of failure, even during the diligence process, where we sort of have our eye out for both in the software architecture and in the organizational structure.
00:24:53.855 --> 00:24:54.336
Interesting.
00:24:54.576 --> 00:24:58.583
And when you're doing more, do you do any consumer product?
00:24:59.203 --> 00:25:00.286
For the most part, yes.
00:25:00.385 --> 00:25:07.414
Yeah, for the most part, we're investing in B2B software companies and sometimes those, you know, B2B to C.
00:25:07.535 --> 00:25:13.561
So it's businesses that are building products and services for other businesses that might serve the children.
00:25:13.582 --> 00:25:13.662
Okay,
00:25:13.923 --> 00:25:18.848
yeah, because I was going to ask about diversity of the engineering team, ethnically everything, right?
00:25:18.868 --> 00:25:21.592
It impacts who they're building for in the demographic.
00:25:22.212 --> 00:25:22.413
So
00:25:22.712 --> 00:25:25.135
diversity is a big word.
00:25:25.876 --> 00:25:26.198
Yes.
00:25:26.594 --> 00:25:33.481
Its impact is profound in ways beyond sort of the superficial way that we sometimes think about diversity.
00:25:33.521 --> 00:25:34.384
Right.
00:25:35.105 --> 00:25:51.367
that diversity isn't just sort of the makeup of the team and where those people came from, but it's like what kind of companies they work for, their levels of experience, the industries they've been in, the type of background and education and that sort of thing.
00:25:51.468 --> 00:26:01.260
So oftentimes, especially with earlier startups, you tend to hire people who kind of look like yourself in some fashion, right?
00:26:02.018 --> 00:26:07.883
you know, I hire people who want to this particular school or who have experience from this particular company.
00:26:07.923 --> 00:26:15.650
And I know, and those are like high achievers and, and, or that company has given them great experience and you might absolutely be right.
00:26:15.789 --> 00:26:24.037
And maybe it makes sense actually to be sort of very uniform early days because you have to outperform much bigger companies.
00:26:24.057 --> 00:26:25.218
You have to hit above your weight.
00:26:25.679 --> 00:26:30.722
And sometimes the most effective way of doing that is having very like-minded people who are working together.
00:26:30.863 --> 00:26:47.682
However, you are susceptible to change that you won't see coming because that similarity is effectively putting blinders on you and you don't have sort of the perspective that will allow you to adapt to change.
00:26:48.042 --> 00:26:51.907
And typically when we're investing in a company, it's already past that.
00:26:52.828 --> 00:26:56.212
PE firms tend not to invest in very early stage startups.
00:26:56.292 --> 00:26:59.167
And so you're already past that.
00:26:59.428 --> 00:27:06.094
And maybe diversity plays even a more important role because you are having to adapt to change.
00:27:06.173 --> 00:27:11.238
And frankly, you're introducing change and you need people who are able to sort of adapt.
00:27:11.357 --> 00:27:14.540
And a diverse set of dimensions, I think, helps.
00:27:14.721 --> 00:27:16.462
And what are the biggest changes that happen?
00:27:16.522 --> 00:27:18.263
So let's go into the first 100 days.
00:27:19.045 --> 00:27:24.490
You're going to have a whole new reporting metrics for some companies that don't have good FP&A.
00:27:25.810 --> 00:27:32.025
I've been through these growth stages And you just let stuff fall through the cracks just to get to where you need to get to.
00:27:32.665 --> 00:27:37.638
And then you get professional investment capital.
00:27:37.679 --> 00:27:39.363
You have to be a professional.
00:27:39.403 --> 00:27:43.354
That's why we call this podcast Growing Pains because you're growing up.
00:27:43.842 --> 00:27:49.015
And even a sophisticated venture is going to make some of those demands on you.
00:27:49.075 --> 00:27:56.051
So what are the most important changes that you see consistently happening for you and for Diversus as a whole?
00:27:56.071 --> 00:27:56.993
Because there's a whole bunch.
00:27:57.054 --> 00:28:00.422
There's go-to-market, there's talent, there's everything else in those first 100 days.
00:28:00.742 --> 00:28:01.726
Yeah.
00:28:01.846 --> 00:28:01.885
So...
00:28:02.018 --> 00:28:18.484
One thing that happens is you've started a process during diligence, you've formulated a plan, the beginnings of a plan, but you only have limited access to everything, to the people, to the systems, that sort of thing.
00:28:18.585 --> 00:28:22.832
So very early day, like on day one, you have to dive in.
00:28:22.872 --> 00:28:31.146
So we tend to take kind of a swarm approach where we have operating partners with different functional expertise.
00:28:31.988 --> 00:28:35.772
And you're just really absorbing and getting your hands on everything.
00:28:35.853 --> 00:28:45.284
So you have to do a deep level of assessment to confirm or refute what you thought you knew going into this transaction.
00:28:45.403 --> 00:28:51.171
And the outcome of that, sort of the output of that exercise is a transformation plan, right?
00:28:51.191 --> 00:29:03.406
So in the first hundred days or sort of like before your first board meeting, you have to have a plan of attack Now, some things may take place on day one or day zero or day minus one.
00:29:03.748 --> 00:29:09.154
The leadership of the company that we acquired might not be part of the transaction, right?
00:29:09.896 --> 00:29:13.361
And certainly across PE, that happens more often than not.
00:29:13.481 --> 00:29:18.989
Like it's actually quite rare that the CEO will stay on post-transaction.
00:29:19.190 --> 00:29:22.334
I think it's about a quarter of the time that maybe that happens.
00:29:22.753 --> 00:29:29.720
And then, you know, of those that stay on more than half of the time within the first two years, they're replaced.
00:29:30.119 --> 00:29:34.624
And it, you know, it's not necessarily because like that person is incompetent.
00:29:34.743 --> 00:29:49.616
It's just that they might not be what you need to get to the next stage that you need to bring this company to, or they might just not be fully aligned with what you have in mind of doing with this company because you have taken control over the company and they might be done.
00:29:49.917 --> 00:29:54.653
It's like, yep, I got my exit and, and I've done, my work here is done.
00:29:55.233 --> 00:30:02.599
So in that first hundred days, you're, you're sort of assessing and having to put in place a new work structure oftentimes.
00:30:02.921 --> 00:30:03.240
Right.
00:30:03.461 --> 00:30:11.288
And, and then, you know, there may be an assessment period where it's like, I want to give this, you know, executive a period of time to see how they do.
00:30:11.508 --> 00:30:20.955
But like, I'm going to keep a close watch on this because I can't, you know, get into year two and two, year three with any regrets about not having leadership in place.
00:30:20.996 --> 00:30:25.200
So you have to make like the biggest thing that you can do is getting the right leadership in place.
00:30:25.200 --> 00:30:25.621
place.
00:30:25.701 --> 00:30:28.544
And typically you wait longer than you should.
00:30:28.744 --> 00:30:32.910
Like you never look back and say, I was too fast by making that change.
00:30:33.150 --> 00:30:37.615
It's usually, I probably should have made it six months earlier.
00:30:37.675 --> 00:30:38.656
Yeah, exactly.
00:30:38.696 --> 00:30:46.207
So you need to do the work necessary to inform potential changes in leadership.
00:30:46.448 --> 00:30:51.233
And you have to feel good about it because these changes don't come without cost.
00:30:51.809 --> 00:30:58.917
Um, and, um, and so, but there, there's certainly a cost of, of not, of, of not making action.
00:30:58.938 --> 00:31:00.640
Yeah.
00:31:00.660 --> 00:31:08.669
And when you do those leadership changes, how much, so you mentioned 25% of the CEOs will stay, then another 50% of those are gone.
00:31:08.689 --> 00:31:13.855
So really only about 10 to 12% are staying, uh, post exit.
00:31:14.316 --> 00:31:16.337
How does that impact the rest of the SLT?
00:31:16.673 --> 00:31:23.923
And for that matter, if it's the leadership of engineering that changes next, how many of those are loyal to that engineer and want to move on with them?
00:31:24.202 --> 00:31:25.444
It could happen, right?
00:31:25.484 --> 00:31:30.371
So it depends on the nature of the company and how it's built.
00:31:30.451 --> 00:31:32.574
And it's something that you have to keep in mind.
00:31:32.753 --> 00:31:45.390
So we're always going to be doing sort of talent assessment and identifying who the keepers are that we really have to invest in to make sure that they're part of the solution and they feel good about that.
00:31:45.857 --> 00:31:48.240
and they're ready to step up and that sort of thing.
00:31:48.520 --> 00:31:58.050
We might identify some where it's like, well, I don't have enough data to know whether they're part of the solution or not, but I have to make that decision within a quarter or two.
00:31:58.230 --> 00:32:00.073
So how am I doing that?
00:32:00.713 --> 00:32:15.509
And if there are others where it's like, well, we need to uplevel this or like we're going to change the shape of the organization in a way and maybe there's efficiencies to be gained in doing that.
00:32:15.842 --> 00:32:21.209
then you have, you know, in that first 100 days, you have to have your plan of what changes you're going to make.
00:32:21.388 --> 00:32:26.315
And you don't want to do these changes sort of onesie-twosie over the course of a year.
00:32:26.576 --> 00:32:34.445
It's better to sort of have a strong plan of what you want the organization to look like and kind of do it all at once.
00:32:34.645 --> 00:32:39.912
Sort of take the hit, but also get the full benefit of putting in place the organization that you think you need.
00:32:40.272 --> 00:32:40.854
I like that.
00:32:40.874 --> 00:32:42.375
That's sort of the Bill Horowitz line.
00:32:42.415 --> 00:32:44.178
If you're going to eat shit, don't nibble.
00:32:45.089 --> 00:32:53.240
Yeah, I try to avoid that metaphor when I'm in the
00:32:54.101 --> 00:32:54.480
midst of
00:32:54.780 --> 00:32:54.882
it.
00:32:55.001 --> 00:32:56.083
Yeah.
00:32:56.403 --> 00:33:07.717
And you have to come to terms with the fact that you might have 50 or 60% attrition in the first year or two, right?
00:33:07.817 --> 00:33:11.902
That seems very extreme and detrimental to the success of the company.
00:33:12.481 --> 00:33:13.442
But it happens.
00:33:13.542 --> 00:33:19.667
This represents a pretty significant change in the direction of the company and how it goes about its business.
00:33:19.867 --> 00:33:31.959
You know, if you've invested in a company that's sort of a lifestyle company, meaning like it's been, they've been doing just enough to sort of maintain a nonprofit to keep, you know, happy and that sort of thing.
00:33:31.999 --> 00:33:37.123
And then along comes an acquirer that has a growth strategy in mind.
00:33:37.463 --> 00:33:39.484
And so you're going to put the pedal to the metal.
00:33:39.586 --> 00:33:41.707
And it was like, that's not what I signed up for.
00:33:41.727 --> 00:33:44.432
I don't want, you know, That's too hard, right?
00:33:44.471 --> 00:33:45.855
And I don't want a piece of that.
00:33:46.296 --> 00:33:54.231
And so you want those people to self-select out or you need to help them out, but they're not going to help you get to where you need to be.
00:33:54.332 --> 00:33:54.953
You need to...
00:33:55.586 --> 00:33:58.929
attract and retain people with the right mindset.
00:33:59.169 --> 00:34:01.832
And it's typically a high performance mindset.
00:34:02.031 --> 00:34:02.712
Right, right.
00:34:03.012 --> 00:34:03.272
Okay.
00:34:03.513 --> 00:34:08.719
And your MO in terms of company tenure within the portfolio is three to five years?
00:34:09.398 --> 00:34:11.340
Just to say anymore, right?
00:34:11.681 --> 00:34:11.762
You
00:34:11.802 --> 00:34:17.467
know, it used to be five years was sort of a good rule of thumb of a horrible period for a PE firm.
00:34:17.786 --> 00:34:20.309
You know, the market dictates that, right?
00:34:20.429 --> 00:34:22.771
And so that can certainly be extended.
00:34:22.891 --> 00:34:30.418
And it's possible that you know, you could achieve your sort of your value creation goals earlier than that.
00:34:30.599 --> 00:34:37.085
And the market is good and there's a good opportunity, but, but usually we're focused on getting to where we need to be.
00:34:37.344 --> 00:34:46.432
And, you know, there's all sort of the standard metrics that we look at around either done, rule of 40, retention metrics and that sort of thing.
00:34:46.552 --> 00:34:56.641
And there could be other measures that are, that are particular to the company and the situation around the product mix or the markets that they play in and that sort of thing.
00:34:56.722 --> 00:35:00.324
So that's what you have to focus on is achieving those.
00:35:01.847 --> 00:35:06.351
The timeline is important though, because it forces a sense of urgency.
00:35:06.572 --> 00:35:08.313
You have no time to waste.
00:35:08.414 --> 00:35:12.336
And so that's why that making the big changes early.
00:35:12.356 --> 00:35:25.067
And sometimes you're going to be underwriting a significant investment to grow And you want to do that early days, right?
00:35:25.106 --> 00:35:26.811
You don't want to do that in the out years.
00:35:27.090 --> 00:35:31.260
So you're going to be more focused on in the out years.
00:35:31.320 --> 00:35:36.452
So if you're going to be taking a hit and spending a lot, you're going to do that in the first couple of years.
00:35:36.731 --> 00:35:38.757
So you have to be ready for that.
00:35:38.936 --> 00:35:39.358
Right.
00:35:39.521 --> 00:35:45.110
And let me ask you, I can't do a podcast without mentioning the impact of AI.
00:35:45.130 --> 00:35:48.396
Are you using any of that in your due diligence process?
00:35:49.577 --> 00:35:51.942
Have you built an agent to do some due diligence?
00:35:52.402 --> 00:35:54.887
I have
00:35:54.927 --> 00:35:56.009
not been replaced by AI
00:35:56.608 --> 00:35:56.670
yet.
00:35:57.130 --> 00:36:01.918
No, of course not you, because there's all the people interviewing you still have to do it.
00:36:02.626 --> 00:36:10.202
Yeah, so we do so in some limited ways, but it's not sort of core to our process yet.
00:36:10.882 --> 00:36:11.184
Okay.
00:36:11.244 --> 00:36:31.088
But because I have a lot of experience applying AI both to business operations and to technology, And I see what the potential is and being able to aggregate knowledge obtained from a variety of sources and being able to interrogate it in a way that gives you meaningful answers is useful.
00:36:31.268 --> 00:36:33.231
And, you know, that's what we're doing.
00:36:33.271 --> 00:36:40.603
And so leveraging LLMs and leveraging agents to help with that is certainly, like, the potential.
00:36:40.704 --> 00:36:44.414
And I imagine that there are other PE firms that are doing that.
00:36:44.434 --> 00:36:48.704
And there's certainly lots of solutions providers that are building such systems.
00:36:49.447 --> 00:36:53.297
How many agent sellers are you seeing a day?
00:36:53.889 --> 00:36:55.510
I don't
00:36:55.530 --> 00:36:58.554
know, because I have an agent that weeks them out.
00:36:58.574 --> 00:37:00.215
Exactly.
00:37:00.615 --> 00:37:01.496
Yeah, a lot.
00:37:01.777 --> 00:37:06.340
You know, AI is sort of on everybody's mind.
00:37:06.380 --> 00:37:11.965
It's on the mind of the LPs that are, you know, investing in the funds that we are deploying.
00:37:12.005 --> 00:37:15.909
It's certainly in the minds of the operators.
00:37:16.208 --> 00:37:19.172
And it's, you know, it has to be in the minds of the companies.
00:37:19.192 --> 00:37:23.856
And part of that is like, you know, how does that impact your thesis, right?
00:37:23.856 --> 00:37:32.092
So now, if you're not contemplating leveraging AI or putting AI at the center of your offering, you're probably behind.
00:37:32.132 --> 00:37:42.014
And so it factors pretty much into every thesis, every acquisition that we make, and certainly into the companies that we already own as part of our portfolio.
00:37:42.722 --> 00:37:44.603
It's front and center.
00:37:44.923 --> 00:37:55.793
And obviously it's like table stakes that you're using AI for Code Assist and for all of these other things using Copilot or OEM or something like that.
00:37:55.813 --> 00:37:58.476
You're using Cursor or Windsor for one of these tools.
00:37:58.695 --> 00:38:00.858
That's just sort of the assumption now.
00:38:01.237 --> 00:38:08.184
And obviously it's not always evenly applied, but on us to make sure that we're getting the full value there.
00:38:09.065 --> 00:38:09.144
Okay.
00:38:09.184 --> 00:38:09.264
Yeah.
00:38:09.284 --> 00:38:13.452
Somebody said, I'll happily get my 450 bucks an hour to Yeah, right.
00:38:13.512 --> 00:38:17.152
Yeah,
00:38:17.353 --> 00:38:18.380
exactly.
00:38:18.420 --> 00:38:20.190
You're my code, yeah.
00:38:20.449 --> 00:38:23.153
Um, but, uh, yeah.
00:38:23.474 --> 00:38:24.014
Um,
00:38:24.396 --> 00:38:28.802
uh, yeah, that's, that's legit.
00:38:28.882 --> 00:38:29.141
Right.
00:38:29.181 --> 00:38:38.556
How do you sort of turn something that you effectively rapid prototypes using cursor into something that will scale into a multi-tenant SAS solution.
00:38:38.735 --> 00:38:39.056
Right.
00:38:39.396 --> 00:38:47.809
So, but you can't deny the impact that very quickly without having to write the code directly longhand.
00:38:48.750 --> 00:38:48.829
Yeah.
00:38:49.250 --> 00:38:52.938
Being able to prompt up a functional POC.
00:38:52.978 --> 00:38:53.885
Yeah.
00:38:54.306 --> 00:38:59.811
You know, it involves stakeholders and even customers and that sort of thing to shape it.
00:38:59.990 --> 00:39:02.693
Having something that actually works is profound.
00:39:02.833 --> 00:39:15.304
And, you know, it's sort of a logical progression from having, you know, like high fidelity prototypes to now like clickable prototypes that sort of behave, you know, pretend to behave.
00:39:15.483 --> 00:39:18.067
And now it's like actually the application, right?
00:39:18.186 --> 00:39:30.579
And because our interaction, sort of our expectations of how we interact with software is changing with agents, it actually kind of shifts the focus away from presentation and more on interaction.
00:39:30.699 --> 00:39:31.539
Right, right.
00:39:31.559 --> 00:39:33.422
And so let me ask you a business question around that.
00:39:34.041 --> 00:39:43.693
You know, there's the famous quote from, I think it was from Sasha Nadella, who said that SaaS is going to die through agents now because, you know, vertical SaaS anyway.
00:39:44.293 --> 00:39:44.634
Yeah.
00:39:44.833 --> 00:39:48.458
And how are you seeing that, A, with your portfolio and B, generally?
00:39:48.858 --> 00:39:49.298
Yeah.
00:39:49.338 --> 00:39:52.742
So provocative statement, which SaaS is a big word.
00:39:53.043 --> 00:39:56.206
So I don't know if my if I'm going to apply it that broadly, but certainly
00:39:56.266 --> 00:39:57.186
vertical SaaS.
00:39:57.206 --> 00:39:58.528
I mean, think about it.
00:39:58.889 --> 00:40:02.773
It's an attribute on a database and agents can go across databases.
00:40:02.972 --> 00:40:16.668
So there's certainly categories of SaaS applications that are sort of workflow built around other systems of record that lend themselves to like crime for disruption with a general workflows.
00:40:17.007 --> 00:40:34.320
And so if you find yourself investing in or building a system that can be replaced by agentic workflows, you should be looking on how you get into the agentic workflow business and out of the business that you've spent potentially decades.
00:40:35.233 --> 00:40:48.869
So it definitely impacts how we view investment opportunities, and it does impact the role that the systems that our portcodes build, how they play in that world.
00:40:49.231 --> 00:40:53.596
So it used to be the case like, well, your application has to have an API, right?
00:40:53.675 --> 00:40:58.681
It has to be connected, programmatically accessible in a larger ecosystem.
00:40:59.101 --> 00:41:02.186
That's been true for well over a decade.
00:41:02.530 --> 00:41:04.733
Now, that's not good enough, right?
00:41:04.793 --> 00:41:14.932
You have to expose capabilities that can be leveraged by an agent that may be working across multiple systems like your own, and you have to be able to plug into that.
00:41:15.233 --> 00:41:21.626
Or potentially you're building the agents that are leveraging different systems that do specific work.
00:41:21.985 --> 00:41:23.829
And so it's a different pattern.
00:41:24.481 --> 00:41:26.911
model to be thinking about.
00:41:27.112 --> 00:41:28.880
And other people are thinking about that.
00:41:28.920 --> 00:41:31.510
So if you're not, then you're probably
00:41:31.530 --> 00:41:31.630
wrong.
00:41:31.650 --> 00:41:32.132
Roadkill.
00:41:32.454 --> 00:41:32.614
Yeah.
00:41:33.356 --> 00:41:33.498
Yeah.
00:41:33.699 --> 00:41:34.141
Interesting.
00:41:34.422 --> 00:41:34.864
Interesting.
00:41:35.777 --> 00:41:43.284
So in the last while, have you changed your thesis as a result of the advances in AI?
00:41:43.425 --> 00:41:44.485
I think we've refined it.
00:41:44.885 --> 00:42:01.559
And basically there's an AI component to not just the criteria that we used when evaluating companies that we might potentially acquire, but thinking about the role that they might play in a largely agentic world.
00:42:01.780 --> 00:42:10.070
Also sort of expectations about the velocity of software development.
00:42:10.471 --> 00:42:24.010
And so we may look at a company that has a very large engineering team and the first thing that we'll think about is like, if we're able to apply AI more significantly, what would this team look like?
00:42:24.449 --> 00:42:32.637
And sometimes it's not just like, oh, we could reduce the headcount here, but it may actually change the people who participate in product development.
00:42:32.657 --> 00:42:34.478
Right, right, right, right.
00:42:34.619 --> 00:42:37.440
Or you just use that engineering team and scale with AI.
00:42:38.242 --> 00:42:39.063
You could, yeah.
00:42:39.103 --> 00:42:45.407
So it also may give you broader capabilities to pursue more things or pursue things faster, for sure.
00:42:45.427 --> 00:42:45.688
Right.
00:42:45.869 --> 00:42:48.050
Well, listen, David, it's been great to talk to you.
00:42:48.070 --> 00:42:57.922
I appreciate all your insights and for voting for what's going to happen and helping our audience out understand what you're looking for when you're doing these due diligence processes.
00:42:58.003 --> 00:43:01.148
And perhaps they can shape up in advance of meeting you.
00:43:01.329 --> 00:43:05.938
You've got a great reputation, both yourself and your organization within the tech community.
00:43:05.978 --> 00:43:10.527
So congratulations on the portfolio you've built and the rewards you're gaining from it.
00:43:10.606 --> 00:43:12.391
So thank you very much for joining us today.
00:43:12.510 --> 00:43:13.192
Thank you, Sean.
00:43:13.253 --> 00:43:14.414
Thanks for the opportunity to
00:43:14.434 --> 00:43:14.514
talk.
00:43:14.835 --> 00:43:15.016
All right.
